Smart beta investing in India portfolio construction implementation and evaluation

Abstract

The smart beta strategies, having marked their footprint in the developed markets in the last decades on the backdrop of the failure of active investing, are capturing emerging markets such as India recently. In this regard, the study attempts to examine the performance of smart beta strategies in long-only, multifactor, and alternative indexing frameworks in India. The study builds alternatively weighted (AW) univariate portfolios. Firstly, the cap-weighted (CW) single-factor portfolios are built. Subsequently, the portfolios are alternatively weighted and compared to the CW portfolio. Next, the CW multifactor portfolios are built and compared with singlefactor portfolios. Finally, the AW multifactor portfolios are built and newlinecompared with CW multifactor portfolios. All the portfolios are tested for their significant performance relative to the risk-free rate, market, and alpha under factor models. The portfolios were constructed from the constituents of NIFTY 500, adjusting for survivorship bias. The sample period spanned over 21 years from 01/10/2000 to 31/09/2021. The hypotheses were tested using the One-Sample T-test or Wilcoxon Signed Rank test for the difference in return, based on return distribution, and the Wald test for the difference in alpha and exposure using the Seemingly Unrelated Regression framework. The portfolios were constructed and analyzed using Python. We find mixed evidence of factor presence; the factor portfolios built on market data such as Illiquid, Winner, Stable, and Size offered better performance than those built on fundamental data such as Value, Strong, and Conservative. The Integrated portfolio does not differ from Mixed and single-factor portfolios, except for underperformance against the Illiquid portfolio. The alternative weighting offered mixed performance at single and multifactor levels.